KLCC Property Holdings - MARKET PERFORM - 24 May 2012

Period   1Q12 

Actual vs. Expectations

The 1Q12 core earnings of RM93m is considered slightly above expectations as it makes up 29% of the street’s FY12E core net profit of RM324m and 30% of our RM308m (see Note1).

Dividends  1^st  quarter interim single tier dividend of 4.0sen, which is a positive surprise since the company usually proposes dividends only in the 2Q and 4Q. We reckon the group may increase frequency of its dividend distribution to attract investors, particularly as it enjoys a higher earnings base from Menara 3 PETRONAS (M3P) and upcoming renewal of PETRONAS Twin Tower (PTT) longterm lease renewals. 

Key Results Highlights

YoY, 1Q12 core earnings grew 35% on the back of 1) contributions from M3P Retail (M3PR) as earnings only kicked in Apr/May 2011 and 2) new management service fees arising from M3P. Mandarin Oriental’s (MO) occupancy rate has also improved  and  we  assume  it  to  be  c.  66%  based on the current ARR of RM585.

QoQ, 1Q12 PBT (ex-fair value) increased 18% to RM187m due to maiden contributions from M3P Office (M3PO) and a more normalized cost (EBIT margin of +5.9ppt to 73.8%). This helped cushion MO’s decline in  operating profit by 9% QoQ. We reckon MO’s occupancy softened from the Nov-Dec 2012 holiday season. 

Outlook  We anticipate renewal of PTT’s long term lease (refer to 2/4/12 report for details). With new M3P contributions and higher rental from PTT’s upcoming lease renewals (1^st  Oct 2012), we reckon there is increasing likelihood of its parent, KLCC Holdings, converting its RCULS. 

Change to Forecasts

Raised FY12-13E core earnings by 9%-11% to RM336m-RM409m, implying NDPS of 15.5-18.8sen (4.8%-5.8% yield) (see below). 

Rating  MAINTAIN MARKET PERFORM

Although FY12-13E net yields are attractive while the stock is trading at trough FY12E core FD PER of 12x and FD PBV levels of 0.6x, we think investors may want to time their entry towards 2013, assuming RCULS conversion takes place then, and we may upgrade our call in 2H12.

Valuation   Maintain TP of RM3.50 based on a 33%* discount to our FD SoP RNAV of RM5.23.

Risks  Decline in MO occupancy rates. Dilutions arising from RCULS conversion. Oversupply of office space in KLCC area.   

Source: Kenanga